The Indonesian Capital Markets and Financial Institutions
Supervisory Agency ("Bapepam-LK") issued
new regulations on Material Transactions ("Material
Transactions Rules") on 25 November 2009 and on
Affiliated Transactions and Conflict of Interest (the
"COI Rules") on 29 November 2009. These
regulations replace and tighten the previous versions of the rules,
and expand the circumstances under which an independent shareholder
resolution is required.

COI Rules

Conflict of interest provisions have a long history as part of
Indonesian corporate governance regulations and are intended to
safeguard minority shareholders in an environment where the vast
majority of public companies are dominated by a single shareholder.
These regulations have traditionally required an independent
valuation and a resolution of independent shareholders to approve
transactions in which the controlling shareholder has an economic
interest. While controlling shareholders have rarely been defeated
on conflict of interest resolutions, this regulation has generally
given minority shareholders an opportunity to provide informed
feedback on related party transactions. Independent shareholder
resolutions are therefore a common feature of Indonesian
transactions involving listed companies.

The new COI Rules come as a welcome revision to previous
regulations published just last year. The previous regulations had
been criticized for giving companies too much flexibility in
interpretation, particularly that the transaction must involve
'unfair pricing' before triggering a requirement for an
independent shareholders resolution. This led to many public
companies relying solely on the independent valuation to show there
was no 'unfair pricing'. On the other hand, cautious
issuers felt the need (or were required by cautious third party
financiers) to obtain independent shareholder resolutions and
independent valuations with respect to many transactions that were
of no obvious detriment to the company, such as transactions
between a company and its wholly owned subsidiaries.

The new COI Rules apply broadly to transactions involving loans,
acquisition and disposition of assets, and transactions involving
shares in the public company or subsidiaries. As with the previous
regulations, they distinguish between "Affiliated
Transactions" - which simply require reporting, and
"Conflict of Interest Transactions" - which involve a
difference of economic interests and which could cause loss to the
listed company. The requirement for 'unfair pricing' has
now been removed, and now most significant transactions with
related parties are potentially Conflict of Interest transactions
and will require an independent valuation.

The new COI Rules maintain exceptions for director and officer
compensation and transactions of minor value (5 billion Rupiah or
0.5% of paid-up capital). There is also an exception for
transactions with wholly owned (or 99%) subsidiaries - transactions
with subsidiaries that have more than 1% minority shareholding will
still need an independent shareholders resolution and an
independent valuation.

Material Transaction Rules

The new Material Transaction Rules are an update of the previous
rules published in 2001. Under the 2001 rules, a transaction was
considered material if its value exceeded 10% of such company's
revenues or 20% of its paid-up capital. The revenue test has been
removed under the new rules, leaving the 20% paid-up capital test
as the sole determining factor of a material transaction. The scope
of the new rules has also been tightened to include the values of
leases, encumbrance of assets, loans and corporate guarantees, and
series of related transactions, in addition to the previously
covered acquisitions, disposals and joint ventures. This leaves far
less flexibility for public companies to structure around the
materiality thresholds.

Under the new rules, material transactions with a value
exceeding 20% but less than 50% of paid-up capital require public
disclosure and an independent valuation. Material transactions with
a value exceeding 50% of paid-up capital additionally require an
independent shareholders resolution to proceed. Exceptions apply
for transactions with wholly owned (or 99%) subsidiaries - but
material transactions with subsidiaries of less than 99% ownership
would still be subject to the Material Transaction Rules.

Any material transaction that also involves a conflict of
interest will be subject to the COI Rules as well.

Generally, the new Material Transaction Rules and COI Rules are
significantly tighter than the previous versions. Independent
shareholder resolutions are likely to again become a regular
feature of significant transactions involving Indonesian listed
companies.

O'Melveny & Myers LLP routinely provides
advice to clients on complex transactions in which these issues may
arise, including finance, mergers and acquisitions, and licensing
arrangements. If you have any questions about the operation of the
applicable statutory provisions or the case law interpreting these
provisions, please contact any of the attorneys listed on this
alert.

A well drafted partnership agreement is vitally important, for taxation, commercial and business succession reasons.

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